India, China Face Risks and Rewards in Mining Afghanistan

Jun. 22 – With the world abuzz over recent estimates that Afghanistan’s mineral deposits could be worth over US$1 trillion, mining companies are scrutinizing the opportunities to exploit the war-ravaged country’s mineral wealth. India and China are expected to be especially interested in tapping the vast deposits, as a large stake in the reserves will not only guarantee material riches but also regional influence.

Afghanistan’s mineral wealth is not a new discovery—geologists have known about its plentiful deposits of iron, copper, lithium and other prized minerals for decades. But the New York Times unveiled an assessment by the Pentagon and U.S. Geological Service early last week that ignited intense interest in Afghanistan’s mining potential, after the report slapped a massive US$1 trillion price estimate on its reserves.

Only a day after the New York Times article, the Afghan Mining Minister Wahuidullah Shahrani held talks with his Indian counterpart B.K. Handique to invite India to bid and develop Afghanistan’s mines primarily through iron ore, copper, gold and coal exploration and extraction.

“The mining industry is in a nascent stage in Afghanistan and they want to grow it,” said Indian Mining Minister B.K. Handique in a June 17 interview with the Business Standard.

“Everybody is now talking of the potential in Afghanistan. We are also equally keen to tap that opportunity. And India is a natural partner for them,” he added.

India, who is friendly with Hamid Karzai’s government, has already invested heavily in Afghanistan’s civilian sector through infrastructure projects like hydroelectricity, road construction, and telecommunications.

Government-sponsored scientists from both countries also plan to meet in July to coordinate in areas of mineral exploration, seismotectonics and remote sensing.

For its part, China has also made deep inroads into Afghanistan, and with its first mover advantage as a large stakeholder in the existing mines, is poised to be the favorite for developing the country’s “newly discovered” mineral resources.

State-owned China Metallurgical Group (CMG) scored the biggest win for China when it won rights to the Aynak copper mine in Logar province with a US$4 billion bid in 2008.

This success is reflective of China’s push outwards to ensure a steady inflow of mineral resources. Because they are driven by a coordinated national strategy, China’s investments are less concerned with the risks Western companies turn away from, including a country as struck by war as Afghanistan.

“Their concern is for the supply of a commodity, so they are willing to do things at a loss,” said Robert Schafer, executive vice president of Canadian mining firm Hunter Dickinson in a June 17 interview with the New York Times.

“I could see the Chinese being willing to make investments in areas where we are unwilling to,” he added. Mr. Schafer’s firm lost its bid to the Aynak mines to China in 2008.

India is focusing on trying to translate its goodwill in Afghanistan into economic rewards. In 2009, five Indian companies, including JSW Steel, Rashtriya Ispat Nigam, Essar Minerals, and Vedanta Group’s Sesa Goa joined Chinese companies to bid on the 1.8 billion ton Hajigak iron ore mines nestled in the Hindu Kush Mountains.

But a corruption scandal involving the previous Minister of Mines accepting a US$30 million bribe from CMG for the Aynak deal tainted the bidding process, and many international companies pulled out of the bidding. The minister was sacked, and in Jan. 2009 Karzai put a hold on bids for Hajigak.

Afghanistan is attempting to bounce back by taking advantage of its newfound PR to woo investors back to a system still rife with problems. A road show on iron ore will be held in London on June 25, where the government will greet 200 companies including Rio Tinto and BHP Billiton in an attempt to showcase the country’s mining exploration potential.

“Afghanistan has a lot of untapped mineral resources which we are now inviting big global companies to come and exploit,” said Shahrani in a June 20 interview with the Hindustan Times.

As the first bids for iron ore and copper mines open in the next few months, serious concerns about Afghanistan’s lack of infrastructure and legal framework, not to mention the ongoing war, will come to the forefront.

“The industry is going to take a look at Afghanistan, but they will weigh their risks carefully,” said Steven Vaughn, a Canadian lawyer and mining expert to the New York Times. “There is every indication that these deposits are very large. But as political risks increase, they will lay off spending.”

It remains to be seen just how high these risks can soar before India and China, in their increasingly ravenous search for commodities abroad, can turn away from the tantalizing mineral windfall in Afghanistan.

developing and then transporting the ore would be a tedious process… Maybe China can use its good offices in Islamabad and get a concession from the Taliban… also transporting the ore to China though CA or Pak will be easy, but for India, we hav to get Iran into the game, coz Pak though accept the transit for a fee is not secure, but the best bet, i suppose would be to setup a plant and sell the products in the local market and central asian markets or even ship it through Iran.

Setting up a plant would not only develop the region economically, but also boost the good will towards the international community…

For Indian mining companies, it would appear that the risks outweigh the opportunity that Afghanistan presents. Security would be a major concern for Indian companies, whose personnel and assets have come under a string of militant attacks.

India’s strategic interests in the Af-Pak region have translated into development flows into Afghanistan. India completed the building of a 215 km-long highway between Delaram and Zaranj early 2009. The highway links Kabul with Iran and onward to Chabahar port and provides India with an alternate access out of Afghanistan.

Transit can be shorter through Pakistan but that is not an option with India-Pakistan relations being what they are. The Iran axis may be an alternative, but that country is under international sanctions. Doing business with Iran could put at risk the much talked-about strategic partnership between the United States and India.

The second major problem would be security. While India remains committed to helping rebuild Afghanistan, a spate of attacks against Indian personnel has forced India to scale down its presence in that country. Currently, there is only one major India project, a hydro-electricity generation project, in Afghanistan. During the recent visit of President Karzai to New Delhi, Prime Minister Manmohan Singh urged the Afghans to ensure security of Indian personnel and assets. India will continue to impart skills training to Afghans but much of the training will be done in India in order to minimise the exposure of Indian personnel in Afghanistan. Incidentally, the highway that India built has since come under attack from militants and parts of it are unusable.

These problems though did not prevent five Indian companies bidding for an iron ore mining project in Afghanistan in 2009. The bids for the project were however cancelled because of a corruption scandal and are now being revived. It remains to be seen if Indians would renew their interest in Afghanistan’s resources. After all, India’s appetite for mineral resources is second only to that of China.